The Bonds of Life

Society depends on rules. But what
sort of rules enliven our world  and what sort stifle it?

Overhearing that I was writing about rules, my
7-year-old niece, Rachel, ran into the room. "I know some rules," she said,
rattling them off. Her list is:

Look both ways before you cross the street.

Check to see how deep the water is before you dive.

Don't take others' medicine.

Never eat old mayonnaise, or mayonnaise that has been left out of the refrigerator too
long.

Never bother a big dog when it is eating, or any kind of dog.

Never leave a thumbtack where someone will sit on it.

Never take a ride with a stranger.

Always check over your work.

Always tell the truth, or you might get into more trouble.

Never look straight at the sun.

Check the lights before you put them on the Christmas tree.

Always stick with your buddy.

Rachel's rules are the distilled and simplified wisdom of experience, products of the
infinite series of trial-and-error learning. Most have exceptions, from accepting a
friend's aspirin to politely pretending to like a hideous wedding present, and we expect
to apply them selectively. Rachel's rules assume, rather than override, our personal
knowledge. We may choose to violate them, with or without a good reason, and to bear the
consequences that naturally follow. (Maybe we're just curious about what happens if you
eat old mayonnaise.)

Most of our public debate over rules, by contrast, is about making such detailed
prescriptions into mandatory, no-exception laws. These rules are rigid and drained of
local knowledge. The consequences of breaking them flow not from the actions themselves
 whose results may be neutral or even positive  but from external law
enforcement. The rules establish narrowly defined categories for all times and
circumstances, hindering progress based on new combinations.

Oppose these confining laws, and you will often be charged with wanting a chaotic
society with no rules at all. It's an effective, but nonsensical, argument. Just as
biological life would be impossible if chemical processes were arbitrary, so social life
would disintegrate if its rules fluctuated unpredictably. The real question is not whether
"rules" in general are good or bad. It is what sort of rules are necessary and
appropriate.

Like the laws of physics and chemistry, which permit the simplest of particles to form
complex combinations, good rules allow us to create the bonds of life  to turn the
atoms of our individual selves, our ideas, and the stuff of our material world into the
complex social, intellectual, and technological molecules that make up our civilization.
Such rules enable competitive processes and effective feedback; they do not dictate
results. They change slowly, and their workings are predictable. They are, in the legal
scholar Richard Epstein's phrase, "simple rules for a complex world."

There are many dynamic systems in the world, many areas of life that evolve and improve
through trial-and-error learning, from "digital organisms" that evolve better
computer programs to global financial markets, from adaptable architecture to
international science. Looking across these various processes, we can find patterns in
their fundamental rules, though we can fully apply those patterns to a specific case only
when we understand that particular system. Here we can only begin the exploration by
laying out some general principles. As an overview, dynamist rules:

allow individuals (including groups of individuals) to act on their own knowledge;

apply to simple, generic units and allow them to combine in many different ways;

establish a framework within which people can create nested, competing frameworks of
more-specific rules.

These principles are very different from the Rachel-style rules that our
technocrat-dominated political discussions have led us to equate with
"governance." In fact, dynamist rules apply to a broad array of circumstances,
not just to politically enforced laws.

Any dynamic, learning system must follow these principles. But the system itself need
not be a global one. It may be nested inside a larger dynamic order: a flexible business
inside the larger economy, for instance, or a department within a larger, evolving
company. And, as the fifth criterion suggests, within broader dynamic systems, there is
also room for more-rigid rules, serving other purposes. If McDonald's wants to make its
menus the same everywhere or a basketball coach wants to require his team to stick to one
set of plays  in each case, valuing consistency above innovation  dynamist
rule making permits that tradeoff too, as long as there is competition.

Personal Knowledge

Once upon a time, the prospect of a "new world" in the Americas inspired
political philosophers to think about the state of nature and how civilization evolves out
of it. From that philosophy, and inherited legal traditions, came new constitutional
regimes and experiments in self-government. Settling new territory requires serious
thought about fundamental rules, thought that not only shapes the new world but can
reshape the old. This is a matter not simply of philosophy but of practice, since pioneers
must evolve new rules to govern the new landscape.

That is why cyberspace is more than a technological fad, why its governance has become
a contentious legal issue, and why it attracts enormous amounts of comment. The
"settlement" of this virtual world has forced its pioneers to consider how and
when rules work. Through trial and error, experimentation and competition, they have
evolved technical standards, etiquette, and boundaries of various sorts. That computer
programs are themselves strings of rules, which in turn depend on more-fundamental rules
embedded in hardware or lower-level software languages, means that even a nonphilosophical
programmer has a practical knowledge of rule structures. And for the more ambitious,
developing the virtual frontier offers a chance to explore and create rules that enable
other people to generate rich, dynamic systems of their own.

Back in 1985, when personal computers were strange and wondrous inventions just
filtering into American homes, Chip Morningstar and his colleagues created an online world
in which Commodore 64 owners could meet, play, and communicate with each other. The
computers were simple, the modems slow, but the world  called Habitat  quickly
became complex. Habitat provided its users with an animated landscape, props, activities,
and cartoon personas called avatars. Users could send each other e-mail or converse
through text in word balloons. Working from this underlying structure, Habitat's virtual
citizens developed a wide variety of social activities and institutions. They invented
games and dance routines, went on treasure hunts and quests, published a newspaper, threw
parties, got "married" and divorced, founded religions and businesses, wrote and
sold poems and stories, and debated weighty issues.

Watching Habitat develop made Morningstar think seriously about how rules shape
societies, and what the limits of rule making are. "It was a small but more or less
complete world, with hundreds and later thousands of inhabitants," he recalls.
"And I, along with my coworkers, was God." In theory, the programmers made the
rules, knew them thoroughly, and could change them at a stroke. But their godlike powers
weren't as limitless as they seemed. Says Morningstar: "Again and again we found that
activities that we had planned based on often unconscious assumptions about user behavior
had completely unexpected outcomes....We could provide opportunities for things to happen,
but we could not predict or dictate the outcome."

If there were chinks in the rules, the players found them. A few enterprising souls
spent hours shuffling between a "Vendroid" machine selling dolls for 75 tokens
and a pawn machine in another region buying them for 100 tokens. When the arbitrageurs had
enough profit to buy crystal balls for 18,000 tokens, they repeated the same procedure
with a pawn machine paying 30,000 tokens, until the Habitat money supply had quintupled
overnight. When questioned about the source of their newfound wealth, they replied,
"We got it fair and square!"

"Unintended consequences really have to do with naive people believing that there
are no holes [in the rules]. It's very easy to seduce yourself into thinking that you've
got everything under control," says Morningstar. "And the reality is, it's
almost never true." Clever people will always come up with ideas no central rule
maker has conceived.

Over and over again, Habitat's designers ran into the limits of their own knowledge.
The range of tastes and knowledge its many users brought to Habitat quickly overwhelmed
the ability of designers to foresee how users would react. A treasure hunt that took weeks
to build lasted less than a day, after a single Habitat resident quickly discovered a
critical clue; the winner had a great time, but most of the other players barely got
started. The system's operators soon realized the value of letting users create their own
games. "It's not that they could necessarily do things that were as good as some of
the things that we had the facilities to do," says Morningstar. "But the things
which they did were much more directly in tune with what people immediately wanted 
because they were much more directly in contact with themselves."

This, then, is the first characteristic of dynamist rules: They allow
individuals (including groups of individuals) to act on their own knowledge. They
recognize that people are "more directly in contact with themselves" than any
rule maker can be. Rules must be simple and general, a foundation on which people can
build, not a detailed blueprint for exactly what they must construct. The rules must
respect the "knowledge problem," the limits of what any authority can know.

The knowledge problem helps explain why lawyer Philip Howard's prescription in his
book, The Death of Common Sense  giving bureaucrats discretion to use
"common sense" in applying technocratic regulations  may curb some
excesses but will eventually break down. To understand the nuances of a situation, to see
it from the inside, a regulator would need the very sort of local knowledge that is
time-consuming to acquire and difficult to articulate. Even when outside officials
sincerely try to balance costs and benefits, they lack the information necessary to make
that calculation. It is hidden in the hearts and minds of diverse people with diverse
tastes, with many different assessments of costs and benefits.

In 1966, the renowned British hairdresser Vidal Sassoon moved to New York and promptly
got into a fight with state cosmetology regulators. Sassoon's precision cuts had freed
straight-haired women from the confines of permanents, teasing, and gobs of hairspray, but
to practice his trade in New York he was required to take a test based on the sort of
hairdressing he hated. "The test requires that I do finger waving, reverse
pin-curling, and a haircut in which you thin as you cut  things that haven't been
used since Gloria Swanson was in silent movies," he said. "I simply cannot take
it on the grounds that it violates everything I've worked for for 21 years." Sassoon
eventually forced state regulators to promise they'd change the test.

Howard's prescription offers no solution to such conflicts. Many people, including New
York state regulators, believed that Sassoon's hairstyles defied common sense. "We're
not going to be told what to do by these damn foreigners, especially those Limeys. Over
there, you can't tell the difference between the boys and the girls!" declared the
head of the state's cosmetology department. Friendlier officials also thought the
regulations perfectly sensible. But hairdressers and their customers will always know much
more than outside regulators about their own circumstances and preferences. The
alternative to honoring that knowledge is imposing a false uniformity, a single, rigid
model of how the world must be.

Using "common sense," technocrats still pick winners and, therefore, losers.
The "knowledge" at stake is not only information but values, tastes, and
individual expression. Three decades after Sassoon's struggles, JoAnne Cornwell, a
third-generation hairstylist and chair of the Africana Department at San Diego State
University, is suing the state of California for forcing its chemical-oriented licensing
requirements on people like her who do only African-style braiding and locking. She
believes the state rules "help perpetuate a negative self-perception on the part of
women with naturally textured hair: Our hair is wrong. Our hair is bad." To people
for whom hairdressing obviously includes chemical treatments, Cornwell's views defy common
sense  the sense of the majority.

Rather than specific rules enforced with broad discretion (and hence uncertainty), a
dynamic vision calls for general rules on which actors can depend  a reliable
foundation on which to build complex, ever-adapting structures that incorporate local
knowledge. Some of those structures may themselves be elaborate new schemes of rules. But
such specific rules will be voluntarily subscribed to, allowed to evolve, and able to
incorporate detailed knowledge of particulars. They will operate as separate, nested
systems within the general rules. They should not be confused with the fundamental rules
that allow special-purpose rules to develop.

Nested rules that evolve to thoroughly incorporate local knowledge can solve tricky
governance problems. The political scientist Elinor Ostrom studies how communities develop
effective ways to share "commons" used by many people and owned by no single
entity. Grazing land and fishing sites are classic examples of commons. Economic theory
predicts that such common property will be overused, since everyone has an incentive to
draw as much as possible from it rather than to conserve. But Ostrom finds many examples
of cooperative institutions evolving to effectively regulate commons use to everyone's
benefit. Many such institutions have lasted for hundreds of years. They have developed
through trial-and-error learning, with the rules made by the same people who must abide by
them.

In the 1970s, for instance, the fishers of Alanya, Turkey, faced a crisis. Overfishing
threatened to deplete stocks and was leading to sometimes violent conflict. Production
costs were rising. So, recounts Ostrom, members of the local fishing cooperative began
more than a decade of experiments to find a way to assign fishing spots. Eventually, they
arrived at a stable solution that preserved both the peace and the fish stocks. It gives
each fishing boat two turns at each fishing location over the course of the year and
spaces out the sites so nobody blocks neighboring nets. The assignments are essentially
self-enforcing, since anyone who tries to steal a good spot out of turn will be caught by
its rightful claimant.

This privately administered system evolved within the broader law: National legislation
permits local cooperatives to make such arrangements, and local authorities officially
accept the list of site assignments each year. Instead of trying to impose a particular
result, the law protected the process by which new local rules could develop peacefully.
That law fostered new bonds.

Local knowledge was critical to developing the Alanya system, which required a great
deal of fine-tuning and information about specific sites. "Central-government
officials could not have crafted such a set of rules without assigning a full-time staff
to work (actually fish) in the area for an extended period," notes Ostrom.
"Fishing sites of varying economic value are commonly associated with inshore
fisheries, but they are almost impossible to map without extensive on-site
experience." The Alanya rules got better over time, as the fishers refined them
through trial and error. Designed to solve particular problems by the people affected,
this new layer of rules does not need to be simple or general. It has specific goals and
is subject to competition, from both Alanya fishers with alternative proposals and other
fisheries with different arrangements. Like a new technology, business, scientific theory,
social arrangement, or work of art, it is the product of dynamic processes.

Generic Units

The shipping container is a marvelous invention. It revolutionized and expanded
international trade by allowing goods to move from trains to trucks to ships without ever
being unpacked. Containers look alike, regardless of their contents, and they can contain
just about anything, from chainsaws to Barbie dolls. They are completely generic.

In their chronicle of how the Internet was built, Where Wizards Stay Up Late,
Katie Hafner and Matthew Lyon use containers as a metaphor to describe how the Internet's
underlying data-transfer rules (called transmission control protocol, or TCP) work. Just
as shipping containers can carry anything across varied transportation modes without
disruption, so TCP allows "packets" of data to move from network to incompatible
network, letting computers of all different sorts communicate with each other. What's
inside the "container," or packet, is irrelevant. By providing a way to bond
wildly different computer networks, this basic protocol made the Internet possible. And
because they were built to be extremely general, TCP and its companion Internet Protocol
(IP) allowed the Net later to encompass technologies and uses its designers never
imagined. Rather than prescribe a particular purpose for the network, TCP/IP established
rules that allowed for surprises.

Again, the settlement of the electronic frontier suggests something about the rules
that foster dynamic systems. Write Hafner and Lyon: "Whatever structure [the Network
Working Group members] chose, they knew they wanted it to be as open, adaptable, and
accessible to inventiveness as possible. The general view was that any protocol was a
potential building block, and so the best approach was to define simple protocols, each
limited in scope, with the expectation that any of them might someday be joined or
modified in various unanticipated ways. The protocol design philosophy adopted by the NWG
broke ground for what came to be widely accepted as the `layered' approach to
protocols....The job of the lower layer was simply to move generic unidentified bits,
regardless of what the bits might define: a file, an interactive session between people at
two terminals, a graphical image, or any other conceivable form of digital data.
Analogously, some water out of the tap is used for making coffee, some for washing dishes,
and some for bathing, but the pipe and faucet don't care; they convey the water
regardless."

Bits, water, shipping containers  these are all generic. Similarly, the
19th-century Midwestern grain trade took off once the Chicago Board of Trade figured out
how to turn individual sacks of grain into a generic commodity that could be stored and
traded interchangeably, based on very broad grades.

These examples suggest the second characteristic of dynamist rules: The
underlying rules apply to simple, generic units and allow them to combine in many
different ways. In this sense, dynamist rules are "atomistic." They do
not specify which molecules must form, or which larger structures those molecules must, in
turn, make up. But atoms rarely float free. And we have only to contemplate the variety of
the world's DNA to glimpse the possibilities that arise when simple units combine in
complex ways.

From atoms to the alphabet, from music to math, the world's plenitude depends on very
primitive units. Their meaning and purpose arise from the bonds they create: the way they
fit together and the new building blocks these combinations then become. From an infinite
series of bonds upon bonds, inspired by our imaginations and diverse tastes, we enrich the
world.

Such bottom-up building is adaptable: The many subunits permit many fine adjustments,
encouraging gradual adaptation instead of radical, all-or-nothing change. They also
accommodate varied needs and tastes. Urban scholar Anne Vernez Moudon notes how small,
regular lots, competing construction styles, and strict but general legal rules led
turn-of-the-century San Franciscans to build the diverse and adaptable Victorian houses
that mark that city to this day.

Rather than try to design the city as a whole, San Francisco's rule makers created a
generic block system. Within the blocks, individual homeowners and builders had wide
latitude to develop their own property to suit their needs and wants: They built detached,
semi-detached, and row houses; they experimented with a variety of setbacks, bases, and
facades; they included commercial buildings amid residences and stores on the first floors
of homes. Patterns, such as putting commercial buildings on corners, emerged over time. As
a whole, Moudon writes, "the architecture of the block was a potpourri of
interpretations of loose rules of development, the result of uncoordinated decisions by
pioneers." Over the ensuing century, this potpourri proved remarkably resilient, able
to adapt to changing demographics and lifestyles, new technologies, and city growth.

Another way of expressing this second dynamist principle is the 19th-century legal
historian Henry Sumner Maine's famous statement that "the movement of the progressive
societies has hitherto been a movement from Status to Contract." A system of status
determines connections and obligations by birth. Contract treats individuals as free and
equal, creating their own bonds. Traditional contract law is as generic and flexible as
Internet packet protocols.

Writes Richard Epstein: "The logic of mutual gain from voluntary exchange is
perfectly general....[It] is not role specific. It does not speak about one set of rules
for employers and another for employees, or one set for landlords and another for tenants.
It does not create one set of rules for people who are rich and powerful and another set
for those who are frail or meek. Instead, the law speaks about two hardy standbys in all
contractual arrangements: A and B. These people are colorless, odorless, and timeless, of
no known nationality, age, race, or sex."

"Contract" does not inspire romance. Its very idealism makes it sound cold
and calculating. We naturally do not see ourselves as generic, so talk of people as
"colorless, odorless, and timeless" hardly appeals to our egos. Only by treating
individuals as equal, generic units, however, can overarching rules allow us to take
advantage of our own knowledge, to express our individuality and follow our own ideas; the
alternative is to force everyone to conform to a few rigid, pre-established categories.

Not surprisingly, then, one of the most effective ways to impose stasis and attack
dynamism is to suggest the superiority of status over contract. Reactionaries invoke the
warm sentiment of fixed status roles that are, by definition, respecters of persons.
Wrapped in enough evocative language, they can make the traditional constraints of class,
race, sex, and geography sound positively humane. In a passage typical of this genre, the
philosopher John Gray declares that humans' "deepest need is a home, a network of
common practices and inherited traditions that confers on them the blessing of a settled
identity....Human beings are above all fragile creatures, for whom the meaning of life is
a local matter that is easily dissipated: their freedom is worthwhile and meaningful to
them only against a background of common cultural forms. Such forms cannot be created anew
for each generation."

Through rhetorical sleight of hand, Gray conflates the desire for lasting commitments
with an appeal for predetermined, inherited status roles. "Revealed preference,"
as the economists say, suggests that people do not crave "settled identity" but
instead tend to seek novelty: We marry outside our ethnic groups; adopt foreign foods and
fashions; invent new words, music, and visual art forms; develop new religious practices
and beliefs. We leave our birthplaces to seek better lives elsewhere. We are forever
fixing up our homes, changing our hairstyles, making up new stories. Such innovations are
almost never "created anew for each generation." They are, rather, evolutionary
variations on old themes. We do not simply jettison the inherited or the familiar 
but we do seek to improve on it. Honoring that pursuit, a dynamist world is, like the
Internet, "open, adaptable, and accessible." By treating individuals as
Epstein's "colorless, odorless, and timeless" A and B, dynamist rules allow us
to forge new bonds  to join our ideas, our property, ourselves in "various
unanticipated ways."

The technocratic alternative is to specify the exact shape of things, to reify detailed
categories. Here the goal is to make a naturally fluid world static, to make labels
permanent: Offices do not belong in homes. A full-time job takes five eight-hour days;
four 10-hour days are not equivalent. Broadcast spectrum assigned to AM radio cannot be
used for cellular phones. Whether such rules seem "conservative" or
"progressive" depends on context, but they are consistently designed to impose
stasis, to limit the bonds of the imagination. They assume categories cannot, will not, or
should not change.

Nor are all static categories so technical, so seemingly dry and mercenary. In the late
19th century, railroads blasted through the granite of social status as surely as their
builders dynamited mountains: On a train, paying passengers became contract's generic As
and Bs  as odorless, timeless, and colorless as water in a pipe or bits on the
Internet. All ticket holders were effectively the same, their contracts for carriage
equally valid. So when black passengers bought tickets for unsegregated first-class cars,
they expected their contracts to be honored, and they made them stick in court. But color
was not an attribute dissolved without resistance.

The railroads, writes the historian Edward Ayers, "neither wanted to police
Southern race relations and then be sued for it nor to run extra cars. It was clear that
white Southerners could not count on the railroads to take matters in hand" by
blocking or expelling black passengers from their first-class cars. "Some whites came
to blame the railroads for the problem," says Ayers, "for it seemed to them that
the corporations as usual were putting profits ahead of the welfare of the region."
The critics were mostly right: The railroads were not civil rights pioneers but
contract-bound businesses. Outraged Southern legislatures, who already resented the
railroads' economic power, passed laws requiring segregated accommodations. (It was one of
these laws, passed by Louisiana in 1892, that the U.S. Supreme Court upheld in the famous
"separate but equal" case, Plessy v. Ferguson.) Combining the technocratic lust
to regulate business with the reactionary zeal to preserve social stability, Jim Crow laws
imposed static definitions on a dynamic commercial culture inclined to treat customers as
"colorless, odorless, and timeless."

Notions of the public welfare have changed, of course, but the idea that race is static
has not. State social service agencies have long engaged in "race matching" of
children with adoptive parents, refusing in many cases to place even biracial children
with white parents. The results have often been tragic: African-American children tend to
stay in the twilight zone of foster care twice as long as their white counterparts. Some
never find a permanent home. Nonblack foster parents often cannot adopt children they have
raised as their own; indeed, asking to adopt can lead authorities to snatch the child from
his home and place him elsewhere.

Race matching, argues the legal scholar Randall Kennedy, hurts children in deep and
abiding ways, condemning them "to the anxiety of having no family that is permanently
and intimately one's own." In addition, "it strengthens the baleful notion that
race is destiny. It buttresses the notion that people of different racial backgrounds
really are different in some moral, unbridgeable, permanent sense. It affirms the notion
that race should be a cage to which people are assigned at birth and from which people
should not be allowed to wander."

This combination of insecurity and cages  and the resulting inability to shape
one's own life by forming chosen bonds  is characteristic of the static world of
status. The colorless, odorless, timeless A and B of contract, by contrast, permit an
infinite series of combinations, encompassing the diversity of human beings and making a
dynamic world resilient. Generic categories and general rules may sound cold, but they
allow us to find our own sources of warmth.

Making Commitments

Contract is not, however, simply about categories. It is also about commitment.
Contracts allow us to incur reciprocal responsibilities, to make promises others can rely
upon, and to establish reasonable expectations for future actions. Those obligations may
be as limited as the agreement to deliver a particular good at a certain price or as
open-ended as the devotion of parents to an adoptive child  but they are all
binding. To speak in chemical terms, the bonds of life create compounds, not mixtures.
Compounds can, of course, be broken up, but that transformation does not take place
easily, and it exacts a cost.

A dynamic society, then, depends not only on preserving fluidity but on permitting
permanence. To learn, we must experiment. But to experiment, we must commit ourselves. And
we must find ways to cooperate with others, to extend trust.

Here, then, is the third characteristic of dynamist rules, a complement to the
second: The rules permit credible, understandable, enduring, and enforceable commitments.
That means not only that the rules are clear and predictable, but that people can be held
to their promises (or penalized for breaking them). This security is essential not only to
individual happiness but to growth, learning, and progress.

The great weakness of Habitat, says Chip Morningstar, was that its residents could not
themselves create new places or objects within its virtual world. Nor could they build
"their own little pockets of the universe," with their own rules. Allowing
participants to add new objects or places meant letting them create software code that
would then enter other participants' computers. That, says Morningstar, would require
"inviting people inside trust boundaries that you just generally couldn't trust
strangers in."

Today, Morningstar and some of his former Habitat colleagues are involved with a new
venture, called Electric Communities, that is designing software to get around this
problem. The goal is to allow "cooperation without vulnerability," to build in
security and flexibility so that online worlds can evolve through the experiments and
invention of their participants. The model is contract  a security system based on
transferable "capabilities" rather than the static identity of passwords and
"authorized user" lists.

Virtual frontiers are not the only settlements that require rules allowing
"cooperation without vulnerability." We can see similar patterns in the
burgeoning cities of the Third World. In his influential 1989 book The Other Path,
the economist Hernando de Soto and a team of researchers identified barriers to legal
entrepreneurship or home ownership in Peru's cities: To comply with all the laws to start
a small garment factory, they found, required 289 days, 11 different permits, and $1,231
("thirty-two times the monthly minimum living wage"); opening a small store
legally would consume 43 days and nearly $600. (These figures, which are strictly for
legal compliance, don't include such basic operating costs as sewing machines or store
inventory.)

Concludes De Soto, "What we have here is bad law." Peru's highly bureaucratic
mercantilist regime represents a perfect melding of reactionary goals and technocratic
means; it maintains a traditional social hierarchy through complex regulations
administered by experts. The country's "bad law" cannot accommodate the
creativity of its ambitious former peasants, and so they defy it. In the face of the law's
prohibitive costs in time and money, poor Peruvians have created an economy that operates
illegally, yet provides services usually considered law-abiding. This "informal
sector" has developed almost half the housing in Lima, built or acquired street
markets worth $41 million, provided almost all urban mass transport, and accounted for
about half of Peru's employment and nearly 40 percent of its gross domestic product.

The law still matters, however, because bad law is only half the story. Informals also
suffer, writes De Soto, "from the absence of a legal system that guarantees and
promotes their economic efficiency  in other words, of good law." For that,
Peruvian society pays a high price. Owners of land without a secure title cannot mortgage
it to finance a business. They cannot confidently rent out all or part of a house, for
fear that the tenant will claim to be the owner. They cannot be sure that any investment
to improve their home will be theirs to keep or transfer. As a result, property without
titles is more likely to remain in shantytown conditions than property with titles.

Or suppose, suggests De Soto, that he and a friend decide to start a button factory. He
has a button-making machine and excellent skills, his friend the necessary contacts to
make the sales. They agree to split the proceeds 60-40, with De Soto, as owner of the
machine, getting the larger share. But they have no way of enforcing the deal over the
long term. "As a result," says De Soto, "my friend will choose instead to
associate with a relative  someone in his extended family. And that person won't
produce buttons as good as mine....The two talents that were required to make a successful
industry in Lima will not be able to merge."

Relying on family ties is only a compromise solution, providing trust but limiting
possible alliances. When people cannot make binding, enforceable commitments, dynamic
progress is severely hampered. While it's wrong to presume that people can't make their
own arrangements, it's equally wrong to imagine that in all cases the deals will be
self-enforcing.

Douglass North, an economic historian who won the Nobel prize for his work on the
relationship between institutions and economic growth, notes that "the inability of
societies to develop effective, low-cost enforcement of contracts is the most important
source of both historical stagnation and underdevelopment in the Third World." The
challenges of Third World and postcommunist development have demonstrated the power of
North's once-controversial insight. Corruption and insecure contracts stifle economic
development.

At best, entrepreneurial individuals find ways to shop for more-reliable legal regimes:
In Russia, contracts are sometimes written to be paid not in currency but in natural gas,
a generic product, for delivery in Germany and, hence, subject to the German rule of law.
In other cases, contracts are backed with bank deposits in London or Bermuda and thus
enforceable under British law. But such international arrangements are hardly "low
cost." Too often the only alternative is real or implied physical intimidation.

Well-functioning legal systems are particularly important when strangers interact, but
even then they mainly exist never to be used. Rather, they establish "the shadow of
the law" under which bargains can be made. The goal is not to inspire legal disputes
but to settle or avoid them. The clearer the rules, the fewer the conflicts. Recognized
procedures for registering property, for instance, may be all that is needed to make title
transfers secure. Rules that eliminate ambiguity make it more likely that people will keep
their promises, for the simple reason that they will understand what in fact they have
promised. And they will know that those promises can be observed by third parties.

Rules that support commitments (and, if applicable, the courts to interpret and enforce
them) sound unobjectionable, even to the enemies of dynamism, who crave stability or
control. But this side of contract, too, wrecks static visions. "Cooperation without
vulnerability" does not make society stable as a whole; it instead provides room for
experimentation and new, unfamiliar bonds. It gives no one central control but, rather,
permits many different arrangements, Morningstar's self-governing "little pockets of
the universe."

Confronted with commitments that disrupt their visions, people who want society to
conform to a static ideal have several options. Most simply, they can refuse to recognize
those agreements: remove children from their would-be parents; allow untitled property to
be seized by nonowners; let railroads throw paying passengers off the train based on race.
This is not simply a matter of court enforcement. For the bonds of contract to work, third
parties must also honor them. If I sell you my house, the bank, the property tax
collectors, and the neighbors all recognize the transfer. The hedge is now yours to trim,
the plumbing yours to fix; if the gardeners or plumbers send me bills, I won't pay them.
And if my friends or relatives enter your new home using keys they got from me, they and I
are both in trouble  because everyone has agreed that the house is now yours.
Our deal is enmeshed in other bonds.

But official recognition also matters. Family law, because it is still largely tied to
status, is rife with examples of commitments unrecognized by the authorities: Legal
disputes over surrogate motherhood hinge on whether courts will recognize the contracting
couple's right to the child. Single-sex couples find their commitments to de facto spouses
disregarded in matters ranging from hospital visitation to inheritance taxes. No-fault
divorce laws nullify marriage contracts that require mutual consent for dissolution.
Ignoring such commitments can, all by itself, erode them.

Alternatively, the bonds of contract can be actively broken and replaced by an order
more to the liking of distant authorities. Universities, for example, give professors the
security of tenure but have long included mandatory retirement in the bargain. Now,
however, they can no longer enforce the retirement contract: Federal law prohibits such
"age discrimination," making tenured professors employees for life and forcing
schools to offer expensive buyouts if they want to make room for younger faculty. The law
has disrupted the progression from one generation of professors to the next and stuck
universities with unproductive scholars who decline buyout offers.

Finally, bonds can be broken indirectly, by attacking the norms that enforce them. In
many communities, geographic and otherwise, reputation is a far more reliable enforcement
mechanism than the vagaries and expense of the courts. Protected in the United States by
the First Amendment and in other free countries by traditions of open discourse,
journalism and science operate almost entirely outside the courts. They are self-governing
professions that trade in truth and rely heavily on trust. Journalists honor promises to
sources and scientists uphold standards of peer review not, with rare exceptions, because
they can be dragged into court but because their professional reputations are at stake.

For reputation to work, however, the rules must allow ostracism. That means permitting
criticism  and not only in extreme, well-publicized cases. But employment law has
seriously eroded the ability of former bosses to give truthful references, especially
about employees who have been fired: Saying anything bad can result in a defamation suit,
while a positive reference can be grounds for a wrongful dismissal case. There is
something disconcerting about calling a newspaper editor for a job reference only to be
told that company policy prohibits any comment other than confirmation of employment. It's
a common practice in many businesses, but especially troubling in a profession that
depends on the free exchange of information and that relies almost entirely on reputation
to check bad actors.

Criticism and Competition

Learning by trial and error means having the chance to try things. It also means
finding out when they don't work, or when something else works better. That, in turn,
implies that other people will get the chance to prove your ideas wrong, or inferior, or
limited to a smaller audience than you imagined. Depending on whether you're trying a new
physics theory, a supposedly improved laundry detergent, or a new style of music,
"error" may be either absolute or relative to other people's alternatives and
current tastes. Progress through trial and error depends not only upon making trials but
on recognizing errors. Criticism is at the very heart of the dynamic process of learning.

But there is always pressure to block criticism: to shut off alternatives, to shelter
the familiar, to stifle the imagination. Criticism is, after all, no fun for its targets.
No one wants to be a failure, even a relative one. So reactionaries who fear disruption,
technocrats who want to pick winners, and self-interested parties who want to shut out
rivals can all be counted on to try to limit criticism and competition. The ability to
resist this collusion against new ideas is perhaps the single most distinguishing feature
of dynamic systems.

This, then, suggests the fourth characteristic of dynamist rules: The rules
protect criticism, competition, and feedback. They allow both the freedom to
challenge established ideas and the freedom to offer alternatives  criticism by
expression and criticism by example. And they make sure that no one has the privilege of
conducting experiments insulated from the effects of failure. Dynamic, evolving systems
have no guaranteed or permanent winners.

Protecting criticism means policing attempts to silence critics by force. Left
unchecked, terror can be an effective way of maintaining stasis. It worked well in the
segregated South, where authorities did not control violent intimidation against blacks or
whites who broke racial norms. By contrast, one reason the historical Luddites failed was
that British authorities enforced the law against their violent acts. And the novelist
Salman Rushdie remains alive and writing in part because the British government has
protected him from religious vigilantes.

The greatest power to block criticism is, however, the legal force held by government
itself. Unlike the Unabomber, legal authorities need not send bombs to random targets
whose ideas they dislike; they can simply ban the expression of those ideas and enforce
the ban with prison terms, a far more efficient approach. That is why government power is
often the first tool stasists try to grab when they want to stop challengers 
whether those challengers are disrupting traditional hairstyling, promoting dissident
political views, or desegregating trains  and it is why dynamists are wary of laws
that hinder competition.

The economic historian Nathan Rosenberg imagines business startups and investment
decisions as "economic experiments," explorations aimed at discovering better
technologies and organizational forms. He emphasizes both "the freedom to conduct
experiments" and the need to test them. And he stresses the danger of letting any
single authority rig the outcomes: "Historically, one of the most distinctive
features of capitalist economies has been the practice of decentralizing authority over
investments to substantial numbers of individuals who stand to make large personal gains
if their decisions are right, who stand to lose heavily if their decisions are wrong, and
who lack the economic or political power to prevent at least some others from proving them
wrong. Indeed, this particular cluster of features constitutes an excellent candidate for
the definition of capitalism."

If your goal is to impose a single, static vision, this "cluster of features"
contains exactly the rules you must overturn. It permits turbulence and annoying
questions. Stasis cannot survive a constant stream of alternatives, whether economic or
intellectual. It can tolerate neither criticism nor uncertain outcomes.

The economic and intellectual spheres are not as easily separated as our political
discussion often suggests. Rules that allow criticism by example often feed criticism by
expression, and vice versa. In many cases, ideas embedded in products and processes are
intimately connected with ideas expressed in words. Braiding salons make not only a profit
but an argument about African beauty. Rushdie's novels are not intangible abstractions but
physical books, sold in public stores.

Even in the nitty-gritty of manufacturing, example and expression are bound together.
When Toyota learned in 1970 that Volkswagen could change dies on a 1,000-ton press in two
hours  half the time it took the Japanese carmaker  the company set out
to beat the competition. Achieving that goal after six months of hard work, Toyota pressed
on, ultimately reaching a once-inconceivable three-minute changeover time. This remarkable
"Single Minute Exchange of Dies," or SMED, technique required both new thinking
about how production is organized and enormous attention to detail. The rules of free
trade, derided by reactionaries for their disruptive effects, spread these new ideas
worldwide: Fierce competition from Toyota and other Japanese companies spurred U.S.
automakers, who would otherwise have considered such fast changeovers impossible, to
reinvent their own production. And along with that criticism by example came criticism by
expression: books, articles, seminars, and consulting by the creators and students of SMED
and other "lean manufacturing" techniques.

Criticism doesn't apply just to old ideas, however. Many "improvements" fail
to excite anyone but their inventors: ScotTowels Junior didn't fit on conventional
paper-towel racks; Maxwell House ready-to-drink coffee couldn't be microwaved in its
original container; Kleenex Avert Virucidal Tissues scared away customers with that deadly
name.

As Jonathan Rauch notes in Kindly Inquisitors, "We can all have three new
ideas every day before breakfast; the trouble is, they will almost always be bad ideas.
The hard part is figuring out who has a good idea." Rauch's concern is protecting
"liberal science," the process of continually checking intellectual hypotheses
through decentralized, rigorous, no-holds-barred discussion. He worries that rules against
giving offense threaten that dynamic process. To work, Rauch argues, liberal science must
allow criticism, without limiting who can participate or what they can say, and it must
give no one the final authority.

This system allows incremental improvements over time, as people refine their views in
response to criticism. And completely different hypotheses can compete, mustering data in
their favor and attacking counterhypotheses: Geologists, chemists, astronomers, and
paleontologists duke it out over whether the impact of an extraterrestrial body led to the
extinction of the dinosaurs. Milton Friedman and Anna Schwartz write The Monetary
History of the United States to show that "money matters," contrary to the
received Keynesian wisdom. Within a decade, the theory of continental drift goes from
geologic crankdom to how the world works.

Hypotheses that challenge established ideas may have a tough time  for good
reason in most cases  but under dynamist rules they can't be squashed altogether,
only marginalized. Anyone can start a journal; form a scholarly, political, or religious
association; set up a Web page or discussion group. Anyone can try to persuade the world
(or the relevant portion of it) of their ideas. The freedom to persuade is central to a
dynamic, learning system, whether the lessons are intellectual, cultural, religious, or
economic. And that persuasion takes many forms, of both expression and example. "At
the root of technological progress is a rhetorical environment that makes it possible for
inventors to be heard," suggests the economic historian and rhetorician D.N.
McCloskey. "Free speech leads to riches." Both showing and telling are
important.

Rules Within Rules

We swim in a sea of rules. Few are as fundamental as the four principles elaborated
above. Rather, they are particular: company policies, traffic laws, religious strictures,
etiquette conventions, professional ethics, grammar and syntax, game rules, software
programs, university honor codes. Between the common law of contracts and "Never eat
old mayonnaise" lie layer upon layer of increasingly specific rules.

The final characteristic of dynamist rules, then, is a rule about rule making:
Dynamist rules establish a framework within which people can create nested, competing
frameworks of more-specific rules. The overall framework allows Morningstar's
"little pockets of the universe" to emerge, establishing their own rules.
Competition  the option to leave one pocket of the universe for an alternative
 permits such specific rule regimes to flourish without making the overall system
rigid or inflexible. We can choose the bonds with which to shape, and reshape, our lives.

In How Buildings Learn, author Stewart Brand examines how buildings are
adapted to new uses over time  and what makes for resilient architecture that can
"learn." His research provides a useful metaphor for dynamic systems in general.
A building, he notes, contains six nested systems: site, structure (the foundation and
load-bearing elements), skin (the exterior), services (wiring, plumbing, heating, etc.),
space plan (the interior layout), and stuff. The further out the system, the more
permanent. Moving around furniture (stuff) is easy, altering a foundation (structure)
extremely difficult.

In a building, writes Brand "the lethargic slow parts are in charge, not the
dazzling rapid ones. Site dominates Structure, which dominates the Skin, which dominates
the Services, which dominate the Space plan, which dominates the Stuff. How a room is
heated depends on how it relates to the heating and cooling Services, which depend on the
energy efficiency of the Skin, which depends on the constraints of the Structure....The
quick processes provide originality and challenge, the slow provide continuity and
constraint." A well-designed, adaptable building, he argues, respects the different
speeds and different functions of these nested layers. It keeps them separate, allowing
"slippage" so that the quick inner layers can change without disrupting the more
permanent systems. (You don't have to tear up the foundation to fix the plumbing.)

So it is with rules in a dynamic, learning system. The basic dynamist rules, like a
building site or foundation, change slowly, if at all. That is why they must be extremely
general. But on top of them, we build increasingly fluid, nested sets of more-specific
rules.

The rules of free inquiry, property, and contract that allow universities to form may
not change much over time, for example, but the institution-specific codes governing
curfews, library privileges, computer use, curriculum requirements, or admissions
procedures can evolve rapidly, assuming each institution is free to govern itself. Between
the general rules and the institution-specific codes lie other rules: the professional
standards that govern scholars, the classification systems that catalog books, the
Internet protocols that link computer systems. Nor must every school adopt the same, or
even similar, rules. A system of free competition and criticism allows room for
fundamentalist Bob Jones University and for freewheeling Berkeley, for requiring senior
theses at Princeton and co-op work internships at Northeastern. By choosing a university
and leaving if they don't like it, students and faculty decide which rules they wish to be
governed by. They don't have to agree on which rules are best for everyone. Nested rules
accommodate diversity.

The more that rules must compete for adherents, the more legitimacy they enjoy and the
more local knowledge they can incorporate. "We reject kings, presidents, and voting.
We believe in rough consensus and running code," declares the Internet Engineering
Task Force Credo, and Internet rules have indeed evolved through trial-and-error
competition. Net pioneers are intensely loyal to that process. Against demands for
censorship and regulation, they reflexively propose flexible, nested alternatives:
filtering software for many different tastes, voluntary Web site "trustmarks"
indicating various audited privacy standards, access-provider terms of service enforced by
banishing rule breakers. These ideas assume that diversity is valuable and that there is
not one best way.

"The value of labels," writes technology intellectual Esther Dyson, "is
that people can pick the rules that suit them, rather than be forced to operate in a
one-size-fits-all environment where everyone has to follow the same rules....The basic
rule is that providers must disclose  label  themselves clearly and honestly.
And they must do what they promise to do." Contract, commitment, and competition
permit diverse, voluntarily accepted nested rule sets.

Competition makes the distinction between dynamist principles and technocratic rule
making all the more clear: Dynamists seek not a world without rules but a world in which
rules govern the appropriate level of life. Rachel's rules exist in a dynamist world,
infused with the knowledge accumulated through generations of trial-and-error learning.
But such rules are the "stuff" of life, the particular maxims through which
individuals govern themselves. They are not the "site" or the
"structure" to which all of society must conform. Dynamist rules permit
complexity and plenitude, even of rules themselves.